Stocks may be hovering around all-time highs (though yesterday’s trouncing didn’t help matters), but what’s driving that high-flying performance has some wondering how long it can last.
What happened: The S&P 500 and Nasdaq hit new record highs earlier this week, but the recent rally has been driven almost exclusively by a tiny number of tech stocks heavily exposed to the AI boom.
While the S&P 500 was hitting its peak this week, most stocks in the index closed below their 200-day moving average.
Last month, almost 80% of stocks in the S&P fell, and the only two sectors that gained over the month were tech and communications — the latter only pulled up because it includes Meta and Alphabet.
Why it’s happening: The AI sector itself is proving to be a problem for the share price of companies that aren’t getting in on the boom.
AI is sucking up capital (to the tune of a trillion dollars or so this year), leaving little investment for the rest of the economy.
At the same time, all that spending by the AI hyperscalers to build more powerful models is fuelling inflation in energy, electronics, and computer hardware. That leaves consumers with less money to spend elsewhere in the economy.
There’s also the run-up of bond yields, which are being lifted in part by heavy borrowing by AI companies. That is likely to eventually weigh on consumer spending, and while that isn’t yet showing up in the data, it may be on investors’ minds.
Why it matters: If AI delivers on its promise of supercharged productivity gains and economic growth, all of this could very well be moot. But a stock market rally supported by only a handful of companies can easily turn into a rout if they falter.—TS
